Iceland’s Tax Reduction Lesson for Canada

What’s the best way to expand a welfare state, irrationally assuming for the moment that you
want to expand a welfare state? Cut taxes. Especially cut corporate taxes. You will collect less revenue every time you nick a dollar but you will have many more dollars to nick – and you will almost certainly find yourself with more tax revenue than you know what to do with. Iceland is a good example. Though tiny in population (with 280,000 people, it has only twice the population of Prince Edward Island), Iceland provides a compact manual to supply-siding your way to public sector expansion, a large-type Big Government for Dummies guidebook.

Iceland now collects far more revenue (as a percentage of gross domestic product) from a low corporate tax rate (18 per cent) than it used to collect from a high corporate tax rate (50 per cent). Thoroughly Nordic in its instincts, the country has used part of this windfall revenue to buy more government – even as other countries have cut back on government. In 1992, Iceland’s government spending accounted for 32 per cent of a stagnant GDP. Now it accounts for 40 per cent of an expanding GDP, a 25-per-cent increase in public sector share in 15 years.

Iceland now buys marginally more government than Canada buys (39.5 per cent of GDP) with cut-rate taxes on personal income and corporate profits – indeed with less than one-half the Canadian rates.

However you split up Iceland’s increase in national income, this small country’s economic transformation in the past 15 years has made it a supply-side example to the world. A basket-case economy in the 1980s, with an inflation rate that hit 100 per cent, Iceland is now the fifth-richest country in the world (based on per capita GDP, adjusted for purchasing power, of $40,000 U.S.). In the International Monetary Fund listing, the only richer countries are (tax haven) Luxembourg, (oil-rich) Norway, (low-tax) Ireland and the U.S. (Canada ranks 10th with per-capita GDP of $35,600).